ANALYSIS: The Fate Of Subsidy In The PIGB

In order to prevent a future insult on the integrity of Nigerians, clarification is needed on who will handle subsidy payments going forward into PIGB; the Nigerian Petroleum Asset Management Company (NAPMAC), the Nigerian Petroleum Company, the government through appropriation, or a market reflective price?

by SaharaReporters, New YorkMay 07, 2018

The Nigerian National Petroleum Corporation (NNPC) was the subject of a discussion at Senate plenary on April 26, 2018. At the end of that session, the corporation was ordered to pay N216billion into the Consolidated Revenue Fund Account (CRFA). The said amount was used to help the Federal Government maintain its ‘deregulated price’ of N145 for a litre of petroleum. This has led to several questions regarding the pricing of petroleum and the unresolved issue of subsidy in Nigeria.

Earlier in 2016, stakeholders, including the National Assembly, Minister of State for Petroleum Ibe Kachikwu, Nigeria Governors Forum (NGF) and Labour unions such as the Nigerian Labour Congress (NLC), Trade Union Congress (TUC), Nigeria Union of Petroleum and Natural Gas Workers (NUPENG) and Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), were all present at a meeting that put a full stop to the last chapter of the subsidy novel.

However, at that same parley, a sequel to the closed non-fiction series was written. The Petroleum Price Product Regulatory Agency (PPPRA) set a ceiling to the price of petroleum. It could not pass N145. This sign was supposedly designed to ensure the cost of the product does not rise up to an expense Nigerians cannot afford.

After that meeting, Kachikwu said: “Pursuant to this, PPPRA has informed me that it will be announcing a new price band effective today, 11th May, 2016 and that the new price for PMS will not be above N145 per litre.”

What the government purposely or blindly ignored is the volatile nature of petrol.

On the day this agreement was reached, without the resultant protests of 2012, the cost of bringing petrol into the country was N133.

Importers had a margin of N12 to play with. At this time, petroleum prices were trending between $39 and $45. Petroleum marketers could not meet their 50% importation obligation, because dollar was a scarce commodity.

In order to save the economy of petroleum producing countries from further collapse, oil cartel, Organisation of Petroleum Exporting Countries (OPEC) and non OPEC members, teamed up to tackle US-produced Shale oil and reduce the volume of production among participating countries. On the 30th of November 2016, OPEC started the long walk to push up oil prices by influencing the forces of demand and supply. On the 10th of December 2016, 11, now 10 non-OPEC countries, and 13, now 14, OPEC countries formed a bond that is still together till this day.

The new type of OPEC has an operating arm called the Joint Ministerial Monitoring Committee (JMMC). The JMMC announced in April 2018 that the OPEC/non OPEC alliance had reached a 129% compliance rate. The outcome of the alliance led to a surge in crude oil prices; from $51-54 in December 2016 to figures ranging between $72 and $75.

What that rise meant for Nigeria

The country’s foreign reserve is currently in the region of $47 billion. The currency is no longer scarce; Inflation rates have been steadily declining from the highs of 18 plus percent to its present 13.34%. The cost of borrowing domestically for the government is trending downward. For the downstream petroleum sector, the negatives continue.

As of December 22, 2017, the landing cost of petrol in the country was N171 per litre. This figure is minus other incurred costs, such as retailers margin, bridging fund (which goes into the Petroleum Equalisation Fund) dealers' cost and transporters' pay, all of which sums up to N14.3. At this time, the price of petroleum was hovering around $64.

As the prices continued to rise, marketers were getting squeezed out of the petrol retail market. The bulk of petroleum importation fell almost solely on NNPC’s shoulders, it was carrying 90% of the burden.

From December 2017 till February 2018, retailers in different parts of the country found it impossible to sell petrol at N145. During the festive weeks, petrol stations in the South-East only agreed to do business at N300. The Department of Petroleum Resources (DPR) trended in the mainstream media for months, shutting down numerous filling stations for hoarding the commodity or selling at exorbitant prices.

When a joint committee of the Senate and House of Representatives summoned Kachikwu, his explanation was: “Going forward we need to address the issue of pricing, there is a disparity between landing cost and the cost we are selling at. If we are going to sell at N145, we need to put some mechanisms in place so that the private sector will go back to importation.

"We have a committee looking at this and we are still going to submit a report for review. “Currently, the landing cost of the product is N170 to N171 and we sell at N145 and the price we are allowed to sell is N145.”

One of Kachikwu’s proposals to enable marketers jump back into the downstream sector is for them to source dollars at N245 — N60 lower than the official exchange rate, which is also N60 to N65 lower than the NAFEX window, and a far cry from what most Nigerians have access to.

His wish stayed as one. The Central Bank was not willing to lose track of all the exchange rates in the country.

“If we keep the price of petrol fixed and there is an increase in crude oil prices, the price of petrol will rise and somebody has to pay for it, whether the NNPC or the Federal Government. Somebody has to pay more and that has to come in the form of subsidy.” This was what the Chairman/Chief Executive Officer, International Energy Services Limited, Dr. Diran Fawibe, told Punch newspapers.

Apparently, the NNPC was doing the paying on behalf of the government, even though the 2017 budget had no provision for subsidies and the National Assembly needed to investigate what was in the open before declaring it illegal. But then, did the members of the legislature present at the subsidy removal meeting not know for a full year that the price of petrol will have to be regularly adjusted or fully allowed to float, since they had no subsidy plans in the 2017 budget?

It is safe to assume they forgot; because on the 30th of March 2018, they submitted a bill to the President for assent with subsidy embossed in it.

The Petroleum Industry Governance Bill

Ten years after the Petroleum Industry Bill re-entered the floor of the National Assembly, both houses finally brought out a harmonized copy. That copy was not the whole bill sent to it; it was just a fraction, known as the Petroleum Industry Governance Bill (PIGB). This bill seeks to dissolve NNPC and create three companies out of it: one regulatory commission and two independent companies with shareholders.

One of the functions of the Petroleum Regulatory Commission (PRC) will be to establish the framework for calculating the fair market value of petroleum products. Prior to the future operation of PRC, PPPRA had been handling this calculation but it was not allowed to determine prices. We could safely conclude that the PIGB signed by the National Assembly allows the government determine prices. If there is a gap between the price calculated by PRC and the price politically determined by the government, subsidies will be called upon — except the government chooses a price that is consistently higher than that computed by PRC.

While delivering his condemnation of NNPC’s subsidy payment at that April 26 plenary, Senate President Bukola Saraki had said: “The important thing is that the NNPC cannot continue going forward making those payments without appropriation, because, definitely, there is subsidy going on now and it needs to be backed by law, which has always been the case since 1999; there had been appropriation for fuel subsidy. It stopped briefly. But now, the NNPC is using the absurd words ‘operational cost’ to justify this expenditure, and we all know this is not operational cost. This is fuel being imported. How that becomes operational cost is even an insult on the integrity of Nigerians.”

In order to prevent a future insult on the integrity of Nigerians, clarification is needed on who will handle subsidy payments going forward into PIGB; the Nigerian Petroleum Asset Management Company (NAPMAC), the Nigerian Petroleum Company, the government through appropriation, or a market reflective price?

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